House Rent Allowance forms part of your salary only if your company policy provides so but just receiving it doesn’t mean that you are eligible to claim deduction of the same. You will be eligible to claim the deduction of HRA only if you satisfy certain conditions. Deduction of HRA is provided upto certain extent from the HRA received and the remaining amount after reducing the deduction is subject to tax under the head “Income from Salary”. The first and foremost condition to claim deduction of HRA – Employee must be paying rent on his accommodation. HRA deduction is allowed, least of the following –

1. 50% of SALARY (if living in metropolitan city) OR 40% of SALARY (if living in other than metropolitan city).
2. HRA received by the Employee.
3. Excess of rent paid over 10% of Salary.

Other related Facts-

• Here,  “Salary”  = Basic Salary + Dearness Allowances provided for employment + Commission based on fixed % of turnover achieved by the employee.

• While calculating HRA we consider only 4 cities to be called as metropolitan and these are Mumbai, Kolkata, Delhi and Madras.

• Rent receipts or a copy of the lease agreement should be retained.

Let’s understand the same with an example  Mr. Rohit living in Mumbai received following amount during the year –

1. Basic Salary- Rs. 72,000
2. Dearness allowance(forming part of salary) – Rs. 6,000
3. HRA – Rs. 40,000
4. Annual Rent Paid- (2500 p.m*12) – Rs. 30,000
5. 2% commission on his annual turnover (sales made by Mr. X during the year is Rs.10,00,000).

COMPUTATION – Here, Total salary will be – Rs. 72,000 + Rs. 6,000 + (2% of 10,00,000) i.e; 20,000 = Rs. 98,000. Least of the following shall be exempt-

1. HRA received – Rs.40,000
2. 50% of Salary (since living in a metropolitan city) – 50% of 98,000 = Rs. 49,000
3. Rent Paid – 10% of Salary ( 30000 – 10% of 98,000) = Rs. 20,200

Therefore, Rs. 20,200 shall be exempt and the balance Rs. 19,800 will be included in gross salary and will subject to tax. Taxmantra.com provides full fledged comprehensive tax planning service wherein we suggest the best investment and tax saving plans, which would minimize your total tax on income.